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Fed finalizes ban on lender-paid bonuses for mortgage brokers

The Federal Reserve has finalized its rules banning lender-paid bonuses for mortgage brokers and loan officers who get borrowers to accept a higher interest rate than necessary.

The Fed said that its consumer tests found that borrowers generally are unaware of the payments lenders make to loan originators and how those payments can affect the total cost of a loan.

These bonuses sometimes are called rebates, or referred to by the technical term yield spread premiums. Brokers can use them to cover borrowers' closing costs, so a homeowner wanting a no-cost refinance might accept a higher interest rate to accomplish that.

Critics said the rebates were little more than kickbacks for higher-cost loans that were worth more when they were traded in the secondary market or sat on lenders' own books. They said loan officers and mortgage brokers often steered borrowers into costlier loans without disclosing that they made more money for doing so -- and kept the rebates.

The Fed's news release Monday said that starting next April a loan originator "may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs."

Originators would still be able to receive compensation that is based on a percentage of the loan amount, which is a common practice.

Press releases covering this and other Fed lending rule can be found in the agency's Aug. 16 news releases on banking and consumers regulatory policy. These include final rules requiring borrowers to be notified when their mortgage loan has been sold or transferred.

Many mortgage brokers complain that new constraints are making it harder for them to serve their customers. Any thoughts out there?